Hallmark Financial Services 8K Announces Third Quarter 2008 Earnings Results | HALL 13 Nov 08

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES THIRD QUARTER 2008 EARNINGS RESULTS

FORT WORTH, Texas, (November 12, 2008) - Hallmark Financial Services, Inc. (NASDAQ: HALL) today reported net income of $0.6 million for the third quarter of 2008 compared to $6.8 million reported for the third quarter of 2007. Year to date, Hallmark reported net income of $15.3 million compared to $20.6 million reported for the first nine months of 2007. On a fully diluted basis, net income was $0.03 per share and $0.73 per share for the third quarter and nine months ended September 30, 2008, as compared to $0.33 per share and $0.99 per share for the similar periods of 2007. Total revenues were $65.0 million and $208.5 million for the third quarter and first nine months of 2008, representing a 10% decrease and a 2% increase from the $72.6 million and $205.3 million reported for the similar periods of 2007.

Mark J. Morrison, President and Chief Executive Officer, said, “Although the operating margins in our core books of business continue to perform well, our quarter and year-to-date results have been adversely affected by the industry-wide impact of hurricane losses and an impaired investment holding related to the ongoing credit crisis. We also experienced lower premium volume due to general economic conditions and our continued underwriting discipline in a competitive marketplace. Hurricanes Dolly and Ike struck Texas during the third quarter resulting in incurred losses and reduced profit sharing commissions of $7.2 million, or $0.23 per diluted share. We also incurred pre-tax impairment charges of $3.2 million, or $0.10 per diluted share, during the quarter predominately related to Washington Mutual senior bank notes.”

Mr. Morrison continued, “Despite these challenging conditions, Hallmark continues to make progress with operating initiatives aimed at driving increased long-term value, including geographic expansion, new product development and the previously announced acquisition during the quarter of The Heath Group, which has historically produced in excess of $40 million of commercial automobile and commercial umbrella risks on an annual basis. This acquisition is expected to be immediately accretive to earnings and is complementary to existing Hallmark operations.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Even with the hurricanes and extraordinary market turmoil experienced this quarter, Hallmark posted a net combined ratio of 95% for the quarter and 91% for the three quarters year-to-date. Book value per share of $9.11 has increased 10% compared to a year ago and is up 5.6% compared to 2007 year-end book value per share of $8.63. However, I am disappointed by the impairment we realized this quarter on our Washington Mutual senior bank notes. Fortunately, this has been the only material impairment of our debt portfolio related to the current credit crisis. Our portfolio has otherwise performed comparatively well during what has been an extremely difficult market environment. Net investment income increased 9% in the quarter and is up 19% year-to-date. Hallmark continues to maintain a diversified portfolio, with fixed income investments representing 88% of invested assets. 91% of the fixed income securities are investment grade rated, 82% are tax-exempt securities and 38% are short-term investments. As of the end of the third quarter, the portfolio had a modified duration of 3.4 years and a tax-equivalent yield over 7%. Hallmark entered 2008 with a significant amount of cash and short-term investments and has benefited from current market opportunities to invest in higher yielding securities of high quality. Hallmark has not owned CDOs, CLOs, CMOs or other securitizations and has not owned any securities issued by Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, Wachovia or AIG, other than a single AAA-rated Fannie Mae debt security that is due to mature in January 2009.”

Mr. Schwarz continued, “Hallmark’s relatively modest net loss experience this quarter in the face of Hurricane Ike, which may prove to be one of the most costly hurricanes on record, is a testament to our approach to managing catastrophe risk. In general, Hallmark remains financially strong and has ample liquidity, with excess capital held at the holding company and year-to-date cash flow from operations of over $37 million. We remain focused on underwriting discipline and growth in book value per share as a measure of increase in long-term shareholder value.”

	Three Months Ended
	September 30,
	2008			2007			% Change
	($ in thousands)
Gross premiums written	$	59,005		$	62,304			-5	%
Net premiums written		56,512			61,863			-9	%
Net premiums earned		58,928			59,763			-1	%
Commission and fee income		3,127			7,280			-57	%
Investment income, net of expenses		4,100			3,774			9	%
Net realized gains (impairments and realized losses)		(2,496	)		418			-697	%
Total revenues		64,989			72,556			-10	%
Net income		631			6,802			-91	%
Common EPS - basic	$	0.03		$	0.33			-91	%
Common EPS - diluted	$	0.03		$	0.33			-91	%
Annualized return on average equity		1.3	%		16.2	%		-92	%
Book value per share	$	9.11		$	8.30			10	%
Cash flow from operations	$	7,409		$	17,173			-57	%

	Nine Months Ended
	September 30,
	2008			2007			% Change
	($ in thousands)
Gross premiums written	$	186,357		$	193,539			-4	%
Net premiums written		179,854			184,930			-3	%
Net premiums earned		177,936			166,721			7	%
Commission and fee income		16,280			23,344			-30	%
Investment income, net of expenses		11,682			9,811			19	%
Net realized gains (impairments and realized losses)		(1,405	)		1,299			-208	%
Total revenues		208,494			205,250			2	%
Net income		15,306			20,587			-26	%
Common EPS - basic	$	0.74		$	0.99			-25	%
Common EPS - diluted	$	0.73		$	0.99			-26	%
Annualized return on average equity		11.1	%		17.0	%		-35	%
Book value per share	$	9.11		$	8.30			10	%
Cash flow from operations	$	37,158		$	61,767			-40	%

The decrease in total revenue for the three months ended September 30, 2008 was primarily due to a reduction in earned premium, recognized net losses on our investment portfolio and lower commission income. The increase in revenue for the nine months ended September 30, 2008 was primarily due to increased earned premium and investment income, partially offset by lower commission income and recognized losses on our investment portfolio. The recognized losses on the investment portfolio included a $3.0 million impairment for a Washington Mutual senior debt security.

Standard Commercial Segment revenues decreased $3.4 million and $0.9 million, or 14% and 1%, during the three and nine months ended September 30, 2008 as compared to the same periods during 2007, due primarily to lower earned premium as a result of general economic conditions and our continued underwriting discipline in an increasingly competitive marketplace. Specialty Commercial Segment revenues decreased $2.7 million, or 8%, and increased $0.6 million, or 1%, during the three months and nine months ended September 30, 2008 as compared to the same periods of 2007, due to lower commission income primarily as a result of retaining a higher percentage of the business produced by an agency subsidiary, partially offset by increased net premiums earned as a result of the increased retention of business. Revenues from the Personal Segment increased $0.9 million and $4.6 million, or 6% and 11%, during the three and nine months ended September 30, 2008 as compared to the same periods during 2007, due largely to geographic expansion into new states. Corporate revenue decreased $2.3 million and $1.1 million for the three and nine months ended September 30, 2008 primarily due to recognized losses on our investment portfolio of $2.5 million and $1.4 million during the three and nine months ended September 30, 2008 as compared to recognized gains on our investment portfolio of $0.4 million and $1.3 million during the same period the prior year, offset by investment income of $0.6 million and $1.6 million for the same periods due to changes in capital allocation.

On a diluted basis per share, net income was $0.03 and $0.73 per share, respectively, for the three months and nine months ended September 30, 2008 as compared to $0.33 and $0.99 per share for the same periods in 2007. The decrease in net income for the three and nine months ended September 30, 2008 was primarily attributable to decreased revenue for the three month period and increased losses and loss adjustment expense for both the three and nine month periods primarily attributable to third quarter net hurricane losses.

Hallmark's net loss ratio was 66.2% for the third quarter of 2008 as compared to 61.4% for the third quarter of 2007. For the year to date, Hallmark’s net loss ratio was 62.1% as compared to 59.8% for the same period the prior year. Hallmark's net expense ratio was 28.8% for the third quarter of 2008 as compared to 27.5% for the third quarter of 2007. For the year to date, Hallmark’s net expense ratio was 28.9% as compared to 27.9% for the same period the prior year. Hallmark maintained a profitable net combined ratio of 95.0% for the third quarter of 2008 and 91.0% for the year to date as compared to 88.9% and 87.7% for the same periods in the prior year.

Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Hallmark’s business involves marketing, distributing, underwriting and servicing commercial insurance, personal insurance and general aviation insurance, as well as providing other insurance related services. The Company’s business is geographically concentrated in the south central and northwest regions of the United States, except for its general aviation business which is written on a national basis. The Company is headquartered in Fort Worth, Texas and its common stock is listed on NASDAQ under the symbol "HALL."

Forward-looking statements in this Release are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Act of 1995. Investors are cautioned that actual results may differ substantially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, continued acceptance of the Company’s products and services in the marketplace, competitive factors, interest rate trends, general economic conditions, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company’s periodic report filings with the Securities and Exchange Commission.

For further information, please contact:

Mark J. Morrison, President and Chief Executive Officer at 817.348.1600

www.hallmarkgrp.com

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands)

	September 30			December 31
ASSETS	2008			2007
	(unaudited)
Investments:
Debt securities, available-for-sale, at fair value	$	180,954		$	248,069
Equity securities, available-for-sale, at fair value		41,568			15,166
Short-term investments, available-for-sale, at fair value		112,965			2,625

Total investments		335,487			265,860

Cash and cash equivalents		24,191			145,884
Restricted cash and cash equivalents		8,963			16,043
Premiums receivable		47,052			46,026
Accounts receivable		5,243			5,219
Receivable for securities		-			27,395
Prepaid reinsurance premiums		2,636			942
Reinsurance recoverable		11,525			4,952
Deferred policy acquisition costs		20,149			19,757
Excess of cost over fair value of net assets acquired		37,738			30,025
Intangible assets		29,683			23,781
Current federal income tax recoverable		1,586			-
Deferred federal income taxes		4,371			275
Prepaid expenses		941			1,240
Other assets		20,115			19,583

Total assets	$	549,680		$	606,982

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable	$	61,760		$	60,814
Structured settlements		-			10,000
Reserves for unpaid losses and loss adjustment expenses		155,288			125,338
Unearned premiums		105,293			102,998
Unearned revenue		2,126			2,949
Accrued agent profit sharing		1,935			2,844
Accrued ceding commission payable		12,193			12,099
Pension liability		1,017			1,669
Current federal income tax		-			864
Payable for securities		5,504			91,401
Accounts payable and other accrued expenses		14,439			16,385

Total liabilities		359,555			427,361

Commitments and Contingencies (Note 17)

Redeemable minority interest		619			-

Stockholders' equity:
Common stock, $.18 par value (authorized 33,333,333 shares in 2008 and 2007; issued 20,816,782 in 2008 and 20,776,080 shares in 2007)		3,747			3,740
Capital in excess of par value		119,649			118,459
Retained earnings		74,649			59,343
Accumulated other comprehensive loss		(8,462	)		(1,844	)
Treasury stock, at cost (7,828 shares in 2008 and 2007)		(77	)		(77	)

Total stockholders' equity		189,506			179,621

	$	549,680		$	606,982

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30						September 30

	2008			2007			2008			2007

Gross premiums written	$	59,005		$	62,304		$	186,357		$	193,539
Ceded premiums written		(2,493	)		(441	)		(6,503	)		(8,609	)
Net premiums written		56,512			61,863			179,854			184,930
Change in unearned premiums		2,416			(2,100	)		(1,918	)		(18,209	)
Net premiums earned		58,928			59,763			177,936			166,721

Investment income, net of expenses		4,100			3,774			11,682			9,811
Net realized gains (impairments and realized losses)		(2,496	)		418			(1,405	)		1,299
Finance charges		1,307			1,206			3,894			3,477
Commission and fees		3,127			7,280			16,280			23,344
Processing and service fees		20			111			98			586
Other income		3			4			9			12

Total revenues		64,989			72,556			208,494			205,250

Losses and loss adjustment expenses		38,981			36,723			110,514			99,620
Other operating expenses		24,041			24,087			71,114			70,511
Interest expense		1,186			1,026			3,557			2,608
Amortization of intangible assets		620			573			1,766			1,719

Total expenses		64,828			62,409			186,951			174,458

Income before tax and minority interest		161			10,147			21,543			30,792
Income tax expense (benefit)		(485	)		3,345			6,222			10,205
Income before minority interest		646			6,802			15,321			20,587
Minority interest		15			-			15			-


Net income	$	631		$	6,802		$	15,306		$	20,587

Common stockholders net income per share:
Basic	$	0.03		$	0.33		$	0.74		$	0.99
Diluted	$	0.03		$	0.33		$	0.73		$	0.99

Hallmark Financial Services, Inc.

Consolidated Segment Data

	Three Months Ended September 30, 2008
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	18,957		$	36,295		$	14,763		$	-		$	70,015

Gross premiums written		18,954			25,288			14,763			-			59,005
Ceded premiums written		(1,274	)		(1,219	)		-			-			(2,493	)
Net premiums written		17,680			24,069			14,763			-			56,512
Change in unearned premiums		1,784			650			(18	)		-			2,416
Net premiums earned		19,464			24,719			14,745			-			58,928

Total revenues		20,280			30,245			16,053			(1,589	)		64,989

Losses and loss adjustment expenses		13,239			16,287			9,455			-			38,981

Pre-tax income (loss), net of minority interest		887			745			2,544			(4,030	)		146

Net loss ratio (2)		68.0	%		65.9	%		64.1	%					66.2	%
Net expense ratio (2)		27.4	%		31.1	%		22.6	%					28.8	%
Net combined ratio (2)		95.4	%		97.0	%		86.7	%					95.0	%

	Three Months Ended September 30, 2007
		Standard			Specialty
		Commercial			Commercial			Personal
		Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	21,945		$	37,919		$	14,854		$	-		$	74,718

Gross premiums written		21,918			25,531			14,855			-			62,304
Ceded premiums written		386			(827	)		-			-			(441	)
Net premiums written		22,304			24,704			14,855			-			61,863
Change in unearned premiums		(311	)		(870	)		(919	)		-			(2,100	)
Net premiums earned		21,993			23,834			13,936			-			59,763

Total revenues		23,718			32,910			15,185			743			72,556

Losses and loss adjustment expenses		13,513			13,682			9,532			(4	)		36,723

Pre-tax income (loss)		3,702			6,500			1,854			(1,909	)		10,147

Net loss ratio (2)		61.4	%		57.4	%		68.4	%					61.4	%
Net expense ratio (2)		27.1	%		30.6	%		22.9	%					27.5	%
Net combined ratio (2)		88.5	%		88.0	%		91.3	%					88.9	%

Produced premium is a non-GAAP measurement that management uses to track total controlled premium produced by our operations. We believe this is a useful tool for users of our financial statements to measure our premium production whether retained by our insurance company subsidiaries or retained by third party insurance carriers where we receive commission revenue.

The net loss ratio is calculated as incurred losses and loss adjustment expenses divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated as underwriting expenses of our insurance company subsidiaries (which include provisional ceding commissions, direct agent commissions, premium taxes and assessments, professional fees, other general underwriting expenses and allocated overhead expenses) and offset by agency fee income, divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.

Hallmark Financial Services, Inc.
Consolidated Segment Data

	Nine Months Ended September 30, 2008
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	62,330		$	104,302		$	46,643		$	-		$	213,275

Gross premiums written		62,327			77,387			46,643			-			186,357
Ceded premiums written		(3,667	)		(2,836	)		-			-			(6,503	)
Net premiums written		58,660			74,551			46,643			-			179,854
Change in unearned premiums		2,224			(1,900	)		(2,242	)		-			(1,918	)
Net premiums earned		60,884			72,651			44,401			-			177,936

Total revenues		64,617			94,617			48,277			983			208,494

Losses and loss adjustment expenses		36,218			45,266			29,030			-			110,514

Pre-tax income (loss), net of minority interest		9,104			12,601			7,047			(7,224	)		21,528

Net loss ratio (2)		59.5	%		62.3	%		65.4	%					62.1	%
Net expense ratio (2)		27.2	%		30.7	%		22.2	%					28.9	%
Net combined ratio (2)		86.7	%		93.0	%		87.6	%					91.0	%

	Nine Months Ended September 30, 2007
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	70,246		$	118,232		$	43,228		$	-		$	231,706

Gross premiums written		70,139			80,172			43,228			-			193,539
Ceded premiums written		(5,053	)		(3,556	)		-			-			(8,609	)
Net premiums written		65,086			76,616			43,228			-			184,930
Change in unearned premiums		(2,966	)		(12,100	)		(3,143	)		-			(18,209	)
Net premiums earned		62,120			64,516			40,085			-			166,721

Total revenues		65,488			93,986			43,654			2,122			205,250

Losses and loss adjustment expenses		37,621			35,398			26,612			(11	)		99,620

Pre-tax income (loss)		9,125			20,627			6,148			(5,108	)		30,792

Net loss ratio (2)		60.6	%		54.9	%		66.4	%					59.8	%
Net expense ratio (2)		27.3	%		31.4	%		23.1	%					27.9	%
Net combined ratio (2)		87.9	%		86.3	%		89.5	%					87.7	%

Hallmark Financial Services (HALL) 8-KAnnounces Third Quarter 2008 Earnings Results